“There is a time when the operation of the machine becomes so odious— makes you so sick at heart— that you can't take part. You can't even passively take part. And you have got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you have got to make it stop. And you have got to indicate to the people who run it, to the people who own it, that unless you are free, the machine will be prevented from working at all.” Mario Savio

29 November 2012

Hyperinflation and the Pernicious Myth of Modern Monetary Theory: Dollar Vigilantes

"One might argue that when the government has to find a private sector buyer for its debt first, rather than selling the debt directly to the central bank, that imposes a certain degree of market discipline on fiscal policy. But it’s hard to see that there is all that much of a disciplinary bonus here.

When a central bank announces that it is prepared to buy government securities, the announcement automatically guarantees an eager private sector market for the securities – if there wasn’t one already. If dealers know that they can promptly re-sell newly purchased securities to the central bank, at some amount over the purchase price no matter how low, then they know they can make a profit from the purchase...

This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations. To the extent that the Fed signals it is willing to buy US debt aggressively, the Treasury can set almost any price it wants for its debt. So it’s not just that there is no insolvency threat haunting US public debt. There is also not a bond vigilante attack threat – not unless the Fed allows that attack to occur."

The limit of the Fed’s ability to monetize sovereign debt is the value of the dollar and its acceptance, at value, for the exchange of goods in a non-compulsory environment. And there is nothing neo-liberal about this. I don't like the neo-liberal approach, but this notion of pain-free monetization is nuts.

If one chooses to not worry so much about the ‘bond vigilantes,’ history suggest that they may well have a care for what I would call the ‘dollar vigilantes.’

The Fed may be hard pressed to buy dollars with — dollars.

The problem with such an approach is that one can ignore the risk for a time, trusting to probability and chance, but when the possible becomes more likely with repetition, it often results in a disaster. It is sort of like driving while texting, a tourist eating street food in Asia, or a small speculator being a non-insider customer at the Comex.

In a increasingly Machiavellian way, they could set up a reciprocity with another central bank or two, say, the BofE and BofJ, and perhaps even the ECB, and I think this has been done even if informally in the past.

But the limitations are still there, even if hidden in a fog of financial engineering. Such an arrangement, which I think exists somewhat informally today, is merely kicking the can of currency failure down the road.

"This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations."

Overt monetization only works for a protracted period in a system in which one has political control over everyone who uses that currency. The logical outcome of a global dollar regime with unilateral monetization is an eventual bid for a one world government where a false vision of reality can be enforced with -- force. Force and fraud are the perennial instruments of economic tyranny.

Hence we are in what is called 'the currency war' wherein the US dollar monetarists are attempting to increasingly impose their will on the rest of the world, and a portion of the rest of the world defers to accept that arrangement.

Blatant exposure is the most dreaded pitfall of any Ponzi scheme. A fiat currency is based on faith and confidence, and the monetary magicians can hardly show their hand, directly monetizing debt without any independent restraint, for fear of provoking a panic, first at the fringes and then at the core of the nation, or empire.

That is the policy error that is also known as 'hyperinflation,' a break in confidence in a currency that is analogous to a 'run on the bank.' It is the case for hyperinflation which I am watching, and still give a low probability. I am fairly sure that even Zimbabwe Ben would not fall for such an obvious trap. But the craven dissembling of Alan Greenspan was also hard to imagine, until it happened.

There are other ways to deal with unpayable debts than merely printing money. A novel idea is to make the issuers and holders of the bonds bear the negative effects of their bad judgement, as in the case of Iceland. But the Banks will always try to shift the burden, which they have created, to the financially illiterate and the weak.

And the problem is not even so much the Fed's propensity to stimulation in the manner of Keynes. The problem is that they are pouring the stimulus into an unreformed rathole of corruption, in the manner of sending aid to a country where it is intercepted by thieves and regional warlords, with little reaching the people.

The US does not have a spending problem so much as it has a 'corrupt financial system problem,' a 'wealth inequality problem with a stagnant wage base,' an 'unsustainable healthcare model problem,' and 'a free trade without adequate domestic policy based boundaries problem.' It was not all that long ago that the US was holding a small annual surplus. What changed was financial deregulation with the financialization of the economy, the easing of trade conditions, concentration of corporate power, tax cuts for the wealthiest, a corrupting political campaign bubble, and unfunded discretionary wars with their associated profiteering.

Forcing small business and workers to compete with state directed slave labor while maintaining a social system founded on private business and median worker wages is insane. The capitalists are not yet selling them the rope, but they are certainly selling them the 97%, and with them the bulk of their customer demand over time.

Perhaps the biggest problem is, as Lord Acton observed, that when you have a concentration of power, men with the mentality of gangsters have taken control. And the US financial system and corporate structure are highly concentrated based on historical standards, resembling the worst of the gilded age of robber barons, or some third world oligarchy in which the people live in voiceless misery.

In summary, I call this 'just monetize the debt without restraint' alternative the “pernicious myth of modern monetary theory.” There are quite a few examples of how this sort of other worldly myth, like the efficient market hypothesis, the Black-Scholes risk model, and the benefits of unrestricted trade, have turned out in the past. When you crush the reality out of a model with a few key assumptions that allow you to obtain a license to do what you will, you often open a Pandora's Box.

The real shame is that an economic tragedy is not outside the plans of some of the worst of the country's elite. Crisis provides opportunity if one is powerful enough, positioned for it, and egotistically twisted enough to think that they can control the madness once it is unleashed. I suggested that the Bankers would make the country another 'offer that they think it cannot refuse' as they did in the manner of TARP. The so called fiscal cliff may be the wrapping paper for it.

I am not suggesting that the current debt based currency system is optimal, not at all. The continual theme here is that the financial system is broken, and that it is based on an unsustainable US dollar regime, and the excesses of money creation through credit expansion by private banks. But to merely shift the corruption from the banks to their partners in the government Treasury is hardly a viable solution.

The answer, as I calculate it, is transparency and reform, and equal justice for all, with malice towards none, in the rule of law. That is an ideal never fully achievable, but that is the benchmark, and one that is worth pursuing, It is sustainable if held close, and continually renewed. That is the spirit of the American experiment in equality and freedom, and is something worth fighting for.

“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

John Kenneth Galbraith, The Age of Uncertainty

"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country.

When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin!

Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

Andrew Jackson, Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels

"Do not forget that every people deserves the regime it is willing to endure!

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Need Little - Want Less - Love More

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, I hope this allows you to make your own decisions in an informed manner, even if it is from learning by my mistakes, which are many. As a standing policy I never provide individual investment advice to anyone. I will only occasionally disclose my personal positions for purposes of illustration. Understand that my own circumstances could differ greatly from your own, and therefore what is suitable for me may not be suitable for you. My comments are intended to be reflection on general macro financial and economic events and trends.